The $20 billion MainStay Marketfield fund's chicken or egg problem

At $20.2 billion, the MainStay Marketfield Fund (MFLDX) represents a third of the entire long-short equity mutual fund category as tracked by Morningstar Inc. The fund, which has swelled from $2 billion two years ago when it was absorbed by New York Life Investment Management's MainStay Investments fund family, is at least four times the size of the next largest long-short mutual fund. Yet Michael Aronstein, the portfolio manager and founder of the seven-year-old fund, insists the fund's recent underperformance has little to do with its rapid, 950% increase in assets since 2012. The fund, which was around $300 million four years ago, has fallen off its perch this year as a category leader with a decline of nearly 4%, compared to a category average gain of 2.4%. The relative under-performance has not been lost of investors. After adding $12 billion in new assets last year, the Marketfield fund experienced $70 million in net outflows in April for its first month of net outflows since August 2011. In a display of rare and refreshing candor in the asset management space, Mr. Aronstein is placing the blame squarely on his own shoulders. “We more or less got it upside down as far as the last three or four months were concerned," he said in an interview. "We were short the defensive staple names that did reasonably well this year.” During a conference call with investors and financial advisers last month, Mr. Aronstein confessed that “the portfolio has been almost completely backwards this year.” Detailing his bets on inflation-based investments that never materialized and sectors in which the portfolio was short with minimal defensive cover, he added, “We've managed to get most things from the stock market standpoint and asset allocation standpoint pretty much wrong this year.” It is a brutal self-assessment from a man with 35 years of industry experience and a solid reputation for being able to navigate global market trends. “He is one of the most humble and nicest guys in the world and he's one of my favorite managers out there, but I've just never seen it work before when the assets get that large,” said Bradley Alford, chief investment officer at Alpha Capital Management. Mr. Alford said he sold the Marketfield fund a few years ago, just as the asset base started to explode. “My whole 25-year career I've seen good performance bring lots of assets and I've seen lots of assets bring bad performance,” he added. “They just got so big that they now have to make all these macro calls because that's the only way to put the money to work.” For perspective, consider that the $4.8 billion Robeco Boston Partners Long/Short Research Fund (BPIRX) and the $895 million Robeco Boston Partners Long/Short Equity Fund (BPLSX) have both been closed to new investors. PLUGGED IN Mr. Aronstein, chief investment officer at Marketfield Asset Management, has been managing the fund on a subadvisory basis since it was absorbed by the New York Life asset management unit. “Clearly, MainStay really plugged this fund into its salesforce,” said Josh Charney, alternative investments analyst at Morningstar. Even as Mr. Charney concurs that the fund has become heavily sold since it become part of MainStay, he doesn't believe the size has been the biggest drag on performance. “At first glance, someone might look at the asset bloat and think that's the problem, but it's really been the bad calls,” he said. “The strategy is based off of multiple themes and a large chunk of them didn't perform well.” For example, the fund was on the opposite side of the recent movements by Amazon.com Inc. (AMZN), The Bank of Ireland (BIR.IR), as well as both the Mexican and European equity markets. “Some of the names that have gone up the most, have come back the most, and that's what the fund was exposed to,” said Mr. Charney, who has given the fund a bronze rating, meaning he still expects it to outperform. “It's only been under-performing the last three or four months,” he said. “The prospects remain positive, it has a good management team and it's really the type of fund that should bode well in a down market.” For his part, Mr. Aronstein is polite enough to discuss the size issue, but his real frustration is the general disconnect between what's happening in the markets compared to what economic logic suggests should be happening. “A $21 billion fund is no harder to manage than a $4 billion fund, it still comes down to getting it right,” he said. “If I had a more active trading approach, it would be hard to manage this much money, but we operate from a very broad, macro-economic perspective. It might take us two weeks to get into a position instead of two days, but we always try to act deliberately over a long time period.” Mr. Aronstein said the fund's 32% turnover rate posted by Morningstar is actually closer to 20%. Todd Rosenbluth, director of ETF and mutual fund research at S&P Capital IQ, said patience is one of Mr. Aronstein's most valuable skills. “There can be a point made that this fund has gotten too big too quickly, and sometimes it will take time for management to get its arms around all those assets,” he said. “But [Mr. Aronstein] tends to be patient with his picks, and that should prevent him from being hampered as much by the size.” LESS LIQUID A $20 billion fund will be definitely hampered when investing in smaller-company stocks because the positions are less liquid. But, as Mr. Charney explained, the fund has always relied more on large-cap stocks and exchange-traded funds for market exposures. With that in mind, investors should not expect Mr. Aronstein to abruptly change course just to appease nervous investors, stem asset outflows or quiet critics. One of the portfolio's main investment themes has been based on a transition from slow economic growth to one that is more robust and driven by inflationary pressures. But, Mr. Aronstein explains, one of the biggest challenges has been navigating the brave new world of modern-day monetary policy. “In certain core sectors, like transportation, the prices are marching on and it's our sense that that [inflationary pressure] will start to spread to other areas of the economy,” Mr. Aronstein said. “But the Fed is still in the midst of the most radical experiment in history and there's no precedent for what's happening on the monetary side.” Meanwhile, he remains adamant that the stage is set for industrials, materials, energy and chemical sectors to eventually benefit from pricing power that will hurt areas such as the service sector and retail stocks. “This has been our thinking for a couple of years as we've been moving in this direction,” he said. “The investment opportunity is very broad and we're trying to separate the world into companies that will benefit from pricing power and those that will not.”